First take on Canadian election results – Macro implications

Bannon Kopko: Good morning. Well, a late night for everyone and a polarizing election, but were there and the people have spoken with Mark Carney's liberals achieving what appears to be a minority victory. But a couple months in an incredible turn of events, a trade war taking center stage.

Thanks everyone for taking the time today to join this morning's election implications call. My name is Bannon Kopko and I'm a veteran here on Scotia's equity sales desk. It's my pleasure to introduce to moderate today's call. We've got some of our key mines on hand to discuss what's happening and changing the key platforms and what we anticipate should happen ahead with stocks, sectors, markets and more.

Our speakers today have already published extensively but expect more from everyone. Soon we're going to be joined by our economist who focuses on Ottawa, Rebecca Young, our rate strategist, Roger Quick, our portfolio strategist, Hugo Saint Marie, and our thematic research strategist, Pat Bryden.

We do have a lot of ground to cover here. In the next hour or so, I'm going to be hosting, and I'll be asking our speakers the questions at the end of the call. There should be a question box on that front at the bottom of your screen, so please put any questions in there and it will try to get to them later in the call. We should probably get rolling. Wanted to hand this off to Rebecca. Rebecca, I'm sure you're well caffeinated and ready to speak. What's changed?

RY: Good morning. Well, a lot has changed, and I think we all, you know, saw quite surprising results last night relative to what was expected. But just very briefly rewinding just five weeks ago, it's been, you know, very long, 5 weeks, but a very short 5 weeks since the campaign was kicked off. And so, you know, over that period of time when we started out, it looked like we could be seeing a majority, but a conservative majority. And over the course of the five weeks, we saw US tensions escalating and we saw the Liberal fortunes turning. And so, on the eve of elections, you know, we all headed in trusting a bit in the polls and you know, we had roughly an 80% chance of seeing a Liberal majority. And that's obviously not what we saw as the night went on. And we wake up this morning, even with considerable uncertainty that we do have the Liberals forming the next government in Canada, but still unclear whether it's a Liberal as it, whether it's a minority or a majority, but most likely a minority.

And it really came down to a two-horse race. And so, what we saw was that, you know, all the other parties really fell to the side and very polarizing Canadians were choosing one horse or the other in this race. So, we wake up. It's not the ideal, it's not ideal for anyone. It's not what Canadians were looking for. They were looking for a strong mandate both on domestic and international issues. Hoping to, you know, set off today on a bunch of issues, which I'll unpack briefly, but you know, I just want to unpack some of the numbers that we're seeing preliminarily because it really impacts how the government might move forward. And as I say, it's come down to a two-horse race.

Right now, the Liberals look like they will have secured about 168 seats. They need 172 for majority. So, they're really only short those 4 potentially 4 or a handful of votes. And that'll be important as we go forward because essentially, they need that majority to move forward on major policies, major legislation. On the flip side, the NDP and the Bloc lost substantial seats. So right now, the NDP is not, even if it an official party, they lost their head looking like they may have seven seats at the end of the day as independence, the Bloc another 23. So, you can see a world where the Liberals may be looking to those parties to form some sort of informal alliance. I don't think it's realistic. The Conservatives lost, you know, the Conservatives have about, look like they'll have about 144 seats, but they're unlikely to ally their side, you know, side up with the, with the Liberals in any form of, of alliance.

So clearly a very tricky environment with which to potentially move forward together. I would say on the flip side, though, as much as the Liberals would be looking for support from some of the other parties to move things forward, the Conservatives would also need to look for support to block things. So, a very, you know, complex situation. And if we look to history, what we know in Canadian history is minority governments don't have a great, they don't have a long shelf life, so they typically don't last, you know, up to the two-year point. The most recent minority government that we've just gone through the four year was an exception to that norm. And so, we're all, you know, Canadians still are on, you know, unfortunately on election risk. And so again, back to where we thought we had a clear majority decisive, victory-one party or the other that could run forward with, with a mandate. We're no longer there right now.

I think I'm the, the, but just a reminder, it does help. So, a lot of uncertainty how the government might move forward, and you know, what they might move forward with and with whom they might move forward and for how long. I think it's worth reminding what the Liberals had planned to do as their best guess of what they might try to do. And recall their platform was, you know, it was a fiscally expansive outlook. So, they had run on a platform to spend about an incremental 80 billion over 4 years. A big chunk of savings was embedded in that outlook, which, you know, really wasn't backed. And they were going to take a more interventionist approach in, you know, leveraging its balance sheet in areas like infrastructure, military, housing, really to try to crowd in private sector investment.

And then we're going to run slightly larger deficits. So, we were looking at likely a deficit of 2% or about 60 billion this year, running down only modestly to a vote of, you know, percentage and ½ over 4 years. Now The Bloc, NDP, we must now look at what they had wanted to do. They ran on equally expansive fiscal platforms and equally superficial savings, some side of the Ledger. So, all that on balance suggests potentially more fiscal pressure as a government looks to form any sort of alliance.

But on top of that, no party really planned for a downside that the plot, you know, the, the baseline that they went into five weeks ago really didn't have the trade tensions that we're seeing. They didn't have this sharp deterioration, especially on the US front that we are seeing. And so even, you know, irrespective of, you know, how they, you know, form an alliance, we already would have expected to likely see deficits bigger than what the Liberals ran on. And just briefly on the, you know, that economic front as a reminder, you know, what does Canada need right now? And what you know, irrespective of, you know, what the government looks like is clearly trade is, you know, on the trade front, negotiation is first and foremost, you know, not just with the US, but how domestically we're going to support some of the sectors hit hardest.

Again, the weakening growth outlook. Platforms hadn't talked about what they would do. Any government is going to need to think about what they might need to do to support or, you know, rapidly weakening economy, both in the Canadian context and internationally. And then that structural reform agenda. Longer term, Canada wasn't on a great path we would have hoped this was a bit of a wakeup call and that we would see more traction, but that's looking dimmer with if we're thinking of a government with a much shorter, shorter shelf life.

So clearly a lot more uncertainty right now. I think we're still, you know, licking wounds, trying to adjust that we didn't get what we wanted or didn't get necessarily what Canada might need. And I would also say there is this risk now of dysfunction. There is this risk that a minority government can't figure out how to move forward even on stuff that makes sense. It should be nonpartisan. And so, you know, we're we'll be mindful of that. But before I hand it over, I do want to say, though it is still preliminary, I think it's premature to fully discount the flip side of potentially a more positive, not put more positive than a majority or a clear mandate, but more positive than perhaps we were kind of waking up this morning. And that's a path where Prime Minister Carney decides that he's going to govern as though he has a majority. He only needs, you know, handful of votes to get things past the line. So, he may just move forward and either call bluff or very strategically negotiate one off supports to move major items. And I think the first few weeks will be very telling that we do expect, you know, within in fact, next week we will see movement on the trade front, on trade threats, on the auto sector, but also stuff that Prime Minister Carney has promised at home in terms of trade supports that he could roll out and would be challenging for other parties to attempt to block.

I think we expect Parliament to come back within by the end of next month. And that would start with a speech from the Throne followed very shortly after by a budget is about 35 billion this fiscal year loan that the Liberal government had pledged to get out the door. So, I think we could potentially see again, you know, in that more positive vein, the Liberals testing the water a bit of how much of that infrastructure spending, how much of that housing, how much of that trade that is potentially less controversial could they get out the door and get support or at least pass the starting line.

So I think, you know, I'll stop there other than to say, you know, unfortunately, you know, in this world where we have and you know, we're waking up in the morning to see what's changed, unfortunately we do have one more degree of uncertainty in the Canadian context and we will always be looking over our shoulder on that, on that election risk.

BK: Yeah, maybe over to Roger.

RQ: Thanks, Rebecca. So, yeah, I'd like to talk about what we think this means for deficits and bond issuance and interest rates. And obviously lots is still uncertain, but I think it's important to note that the Liberal Party platform had a pretty significant deficit of 2% of GDP, 62 billion as Rebecca said. Which is a lot. But it's important to note that a lot of that is kind of already in the market. It's kind of a known quantity in the bond market. And I think that partly explains why we've seen a quite a muted reaction so far in terms of interest rates.

So, the $62 billion deficit and spending platform, the government has already increased bond issuance a lot. And I know we have a lot of bond people on this call in the audience, but for people that aren't in the bond market, I'll give it a little bit of background. So, the government in issuing Canada bonds, they've increased issuance already 38 billion on an annualized basis from what it was last quarter. So right now, they're running at a 312 billion annualized pace, which is a lot. And if we go through the Liberal platform, the one with the 62 billion deficits, you take that number, you take some of the other things that they had to pay off, like all the maturing bonds and you come to a required bond issuance amount of about that. Something like 310, three, 120 billion.

So, a big part of that large, uh, spending platform is kind of already in the market and this is already happening. So, the new fiscal year started at the beginning of April. They've had five bond auctions. Those already reflect these larger issuance amounts to get us to that kind of $312 billion number. So, a fair bit of that's in the market now. Obviously, there's lots that can change. And even with that, that large Liberal spending platform in 32, sorry, $62 billion deficit, if anything, that deficit is almost certainly going to be higher. And that was the case with the with the Conservative platform as well. Both the Liberal Party and the Conservatives were making quite an optimistic growth assumption. Whereas in our view, you know, the Canadian economy as the trade war continues is much more likely to be moving toward recession by the end of this year. And so, in that scenario, you would have been looking at larger deficits, whether it was the Conservatives or the Liberals. So, some risk of higher number, higher deficit number still and more bond issuance still, but a fair bit of this is already in the market.

You can see this in a number of market measures. If you look at how you know we're obviously despite their somewhat decoupling we've had with the US policy wise, but you know we're still closely related to the US market. But if you look at the relationship between Canada and US yields, our bond yields already reflected a significant amount of bond issuance in that our yields increased relative to the US We're still far below, but we've gone from historic extremes below the US to less extreme. So, some of that and that's been happening particularly in the last month and since the start of the year. So, some of this increased deficit is kind of has already been anticipated by the market. You also see it in the relationship between bond yields and interest rate swaps, which is a bit more of a specialized part of the market for some of our audience. But basically, those two things are reasonably close substitutes. As bond issuance is increasing, that puts pressure on the bond yield relative to the swap rate and the relationship goes more and more negative. And we've seen that play out in pretty dramatic fashion. So, there's a couple of signs there that the market has already anticipated a significant amount of spending increases.

That's not to say there won't be more, but it's also, you know, it's very uncertain. Obviously, the outlook depends a lot on what happens with the US, with the tariffs, with the trade war. It depends a lot on how the Liberals govern in this minority. You know, and as Rebecca said, I mean, it could be the typical case and, and as they did under the Trudeau Liberals where they partnered with the NDP. I would hope, and I might be getting a little optimistic here, that, you know, I do think this election was different in that we had this quote, existential threat from the US and you know, the wakeup call that Canada had to get a lot of its economic house in order. And I would hope that, you know, I think there is that common ground on a number of issues. Obviously military spending is an easy one, but some of the other ones as well, infrastructure, some reduced regulation, reduce taxes. So, I would hope that there is some common ground Carney can kind of govern from that standpoint, but we'll have we'll have to see to see how that plays out.

So, I do think there's lots of that we still have to see to see how it plays out. But so, I do think, you know, the risks are still that issuance or the deficits go up, the government spending goes up and issuance goes up further. But I think that's going to play out over a bit more of a longer time frame. And I think at the moment a fair bit of this result, as I said, has I think already been effectively anticipated by the bond market. I do think it means as that it as that deficit is likely to stay higher, go higher. I think that that bond supply will tend to keep pressure on mid- and longer-term yields keeping them somewhat higher. I do think the central bank in Canada probably has some room to lower rates further, perhaps not as much as if it was a conservative majority because then you know, there wouldn't be as much fiscal spending presumably more and then more room perhaps for the central bank to cut. In this case, the central bank may be a little more concerned about the degree of fiscal stimulus, but I would think that there's still some scope for lower rates at the front end. So, I think we're probably looking at still a tendency for the yield curve to steepen and for mid- and longer-term deals to be somewhat supported or pressured by the continued fiscal stimulus. But, you know, very uncertain, and I hope my optimistic take on it proves right. But we'll have to see how that goes. I'm going to leave it there because I know we have lots of room for questions at the end. And I'm going to hand it over to Hugo on a portfolio strategy.

HM: Thank you, Roger. I think this is probably the most challenging outcome to analyze for two reasons. Number one, we don't have the final results just yet. Some ridings are still too close to call. And two, I would say several parties will likely have their say on Canadian policies going forward, which complicate the matters if you will. But no matter how you slice it or dice it, I think this morning Canadian elected a government, a minority government, which to be fair might not be as pro-growth as I was expecting a few weeks back. Based on current results.

I'll flag a few key points I would say #1 Carney will face extremely elevated expectations, like he's been elected essentially to stand up to Toronto, defend Canada. Think if he fails to deliver during the upcoming trade negotiation with the Trump administration, meaning tariffs in place or the situation were to get worse because shine and the renewed interest for the Liberal Party could quickly fade. Minority government, as other people said, have short life span. So, is it going to lead to another federal election next year or so? Time will tell, but clearly that will keep political uncertainty in the country quite elevated for some time. And keep in mind that Carney will have to lead trade negotiations with, I would say, minority government, which will probably complicate this job quite a lot.

Point #2 let's say the Liberal government, minority Liberal government would need support from the NDP and Bloc or both to run the country. So, my fear, my concern is that we're about to watch a remake of the past few years. Maybe I'm a bit more negative this morning. But again, my concern is the pro-growth economic agenda just could not be as strong as expected. As I mentioned a few weeks back or a couple months ago, I fear that the man from the opposition parties will just dilute the agenda and install the pro-growth agenda. So, I won't spend much time on big spending, big deficit, Roger talked about it, but clearly, we're on track to see bigger numbers, bigger deficits down the road.

Another point, from a Canadian equity standpoint, I would say at the margin that's a slightly negative. Listen, it's not negative enough to downgrade Canadian equities, but I would say at the margin this is slightly disappointing, slightly negative. If you recall, we recently upgraded Canadian equities to an overweight recommendation. The upgrade was due to let's say several considerations. But clearly one of them was that the wakeup calls that everybody Trump administration would lead or would force the next government to become focused on a growth agenda, which this morning in my opinion is less likely to happen given the current composition of the Parliament. I think to attract foreign investors in this country, we need to see superior economic growth, we need to see superior earnings growth by Canadian companies. And I would say there's probably more of a question mark around all this morning then then then a few weeks back, a few months ago.

And in terms of sector lineup, I'll be brief again, there's still a lot of uncertainty. But I believe this morning we could say that it's a net negative for the oil and gas industry, for fossil fuel. Clearly that could increase the angst or the alienation in Western Canada within the energy space. I think it's a net positive for renewable clean energy. We see that as a positive as well for probably engineering construction companies. If we have big infrastructure spending in the next few years, clearly, we need more engineering work, more construction work to be done so that could support the space in the industrial sector. And overall, when you looked at the market reaction on, on an equity standpoint this morning, we watch the cane dollar watch bond yield, it's very muted likely due because well, again, there's a lot of uncertainty not just about the upcoming government, but about upcoming policies as well. I will leave it at that and pass it over to Pat Brydon,

PB: Hello everyone. Yeah, just want to provide a few quick perspectives on minority governments, how they might function and caveat some limitations here and then we'll jump into some sector specific comments to elaborate a little bit more on what Hugo had outlined here. So just firstly on minority governments, you know, the Liberals and the Conservatives are the only two parties that have ruled in Canada except for one period in World War One. And then over the past quarter century, if you look at how the federal government has been run, it's, it's been, you know, under minority situations for almost half the time. So, it's not uncommon to see this. But obviously it's a tricky time for this to take place. Should it be a minority government? And as mentioned, the final vote counts and potentially recounts are still underway.

When we look at the recent government run by the Liberal, you know, it lasted quite a long time as a minority with a supply and confidence agreement between the Liberals and the New Democratic Party of Canada. That is not typical, but I think it's something to maybe bear in mind, given the recent sort of geoeconomic uncertainties for Canada, that could prompt a higher level of cooperation between some of the parties to foster stable government. Obviously, there's a risk there that alternatively, the public might clamor for a renewed electoral process to seek a clear majority. So that's all TBD, when you specifically turn your attention to how might a majority actually for a minority government, pardon me, actually function, there's a number of potential pathways. One of them is just sort of simple legislative compromise where bills that get drafted have to be acceptable to the other parties or they won't be advanced. The other is the opposition can basically have that influence of a threat of non-confidence vote in the House. And as Rebecca touched on, there's complexities to that given where the seat positions currently are. And then the next consideration would be there can be limitations on legislation, obviously. So, can you get everything done that you wanted to or might have to do more than you expected given the influences? And then finally, that can just result in instability.

Another feature that could occur is a coalition government where you have all the parties come together and that would basically probably include ministers from each party within cabinet. That's a pretty rare feature in Canada, but that is something that may happen given what's afoot, not just domestically, but internationally for Canada in terms of navigation through the sector implications. We do want to really emphasize a few caveats and limitations here. Again, a minority government is not uncommon in Canada, but it is uncommon at this time in terms of the international pressures that the country faces. The Liberals are expected to be invited to govern. And so, what we've done is we've looked at their platform policies, our best guideline to what's in play today. In actuality, the policies that we see there are going to be subject to the demands of partners most likely and that will be in order to secure enough votes to govern effectively within the House. And so, I just want to underline for our listeners that we really do advance our sector specific views with the caveat and the limitations that are expected here in terms of outcomes.

It's far from certain what will happen. And if an outright majority does materialize that would simplify things in a final vote count. But as of now it's a minority situation. So having said all that, energy efficient infrastructure, as Hugo touched on, a liberal minority in government here says leading would certainly in our viewpoint to those tailwinds for utilities, transmission, renewables and nuclear. And when we look at the other side of the energy equation on the oil and gas producers, a liberal minority is likely negative for all the gas and fossil fuel producers. In general. When we look into the sector itself, more specifically, oil sands companies tend to exhibit higher energy intensities and higher emissions and so they are potentially more vulnerable than some of the other patriots. If we think about natural gas, we view that as likely less negative due to the lower emissions intensities that those businesses have. And I think it's fair to say that there are tailwinds for that component of the sector. We have LG Canada coming on and there's other small LNG projects afoot for, you know, gas fired power generation, obviously offshore, but even onshore with data, data centers and electrification.

So, some dynamics to think about there. When we look at policies within the sector, the Liberals are expected to continue to favor an emissions cap. They're expected to further sort of improve and advance industrial carbon taxes. So, we would expect pricing to be articulated further into the next decade and escalate. And then as a consequence of that we would expect decarbonization spending two accelerate. So, there are significant strategic factors to consider for the sector here as it pushes ahead. When we switch our attention to industrials, there's no question on the campaign trail there was a very pro-growth agenda evident. And fundamentally in our view much of that relates to Canada's need to buttress its economic and political sovereignty in the face of greater global instability and uncertainties. And that includes far ranging areas of the economy from, as we touched on energy infrastructure and resource development to things like ground transportation, deep water ports, other strategic elements like Arctic sovereignty and defense systems. And then there's other dimensions with initiatives such as a reinvigorated, reinvigorated digital corridor in Canada to support growth and technology applications.

In all these scenarios, we totally agree with what Hugo said, that there's a need for greater engineering, procurement and construction. And so, we think the logistics around all of this will be very high. Thinking about mining specifically critical minerals and industrial metals unquestionably garnered heightened importance through the campaign and obviously in in recent years. And that again just relates to geostrategic and technological developments that that all parties were very well, well aware of in the campaign. In parallel with that, gold and precious metals are also high on the list of considerations for many investors. And this again relates to global turmoil and uncertainty. And Canada for sure remains a critical part of the industry on this front. So, within mining especially, we all so want to emphasize that it is, you know, classified as a heavy emissions sector. So that improvement, so to speak, to the industrial carbon tax system. We'll be watching closely as investors and companies try to think about how the emission strategies and the policies evolve over time.

And then lastly, I think we just want to touch on a Nexus of a few areas, and this includes real estate, the idea of affordability, and then forestry. So, the campaign acknowledged that there's clearly a lot of voter angst about affordability. And I think you saw that come through the results last night. And central to that is the housing crisis. There are construction strategies to potentially see a pace that's similar to or certainly not something we've seen since World War 2 in terms of home building in the country. The Liberal Party would advance a government supported and propelled initiative there. And we do think that for the forestry sector within Canada, that likely means that demand domestically is is better than we probably thought it would have been a few months ago. And then diving specifically within to the real estate dimension of that, you know, Liberal government is positioned on the carbon tax to not apply industrial taxes to residential apartment buildings. And so that would be benefit to the sector for residential apartment businesses where net operating income growth could be in the range of 1 to 2% and, and, and that would likely be viewed as a positive upside to estimates in an environment where investors have been focused on earnings downside revisions. So, I'll leave the comments there on the sector specific implications. I'll turn it back to Bannon, and I think we'll engage in Q&A now. Thanks, Bannon.

BK: Thanks for that. Nice job, everyone. A quick reminder, as Pat mentioned, there should be a question box at the bottom of your screen. Please put any questions you have in there and we'll try to get to it during the question and we'll get to questions. We do have some already sort of populating here, so I'll try and get to yours. I guess I've got one here for Rebecca and probably for Roger as well. Just talking about the deficit, which we did get to. Have you modeled or do you have a sense of what the deficit will look like if Canada enters a moderate recession, you know, through the next couple of years, you know, keeping everything kind of steady, you know, based on revenue losses and are keeping the spending promises discussed. Any thoughts there maybe Rebecca and then Roger.

RY: Yeah, let me let me start out and the answer is yes and no because when you know, the economy hits the recession, there's part that's automatic that happens irrespective of what leaders want or not. But a big part is discretionary. So, what leaders want and can execute what I would say, you know, we updated our economic outlook mid-month. We incorporated a lot of the uncertainty; we incorporated a lot of the US weakness in activity. But what we also incorporated was, you know, more likely fiscal responsiveness on the Canadian side of things. So, we had the US economy, you know, looking out through 2025/2026, more or less flirting with recession for a couple of quarters. So pretty weak just based on the tariffs that were already implemented, not based on stuff that, you know, may, you know, may get worse or things that may break along the way.

For the Canadian context though, just a little bit marginally better. What we had size roughly based on just that current economic modeling is that very roughly 2 1/2 percentage points of GDP stimulus would be required just to offset those economic headwinds. What we did because of that sense that any party would support the economy based on platforms we penciled in very roughly about one percentage point GDP response, and you know, fiscal discretionary measures. So, we're more or less, you know, we think that's roughly still about right. Obviously, we've discounted a lot of the platform pledges because there's a lot of execution risk and infrastructure related projects. Irrespective of whether you have a majority or not. But all that to say, you know, we already have a weak outlook, likely to see automatic drivers weakening and likely to see some discretionary, but I would say not enough discretionary if especially if we saw a much more serious weakening. And so when we look at, you know, a sharper downturn, something more in the order of, you know, a GFC crises, we could very easily see a fiscal response of about 2 1/2 percentage points of GDP or, you know, looking at 60, 70, 80 billion over, you know, 6 to 8 quarters are really to support or, you know, bolster the economy. And so, you know, that would bring, you know, we mentioned, you know, the outlook based on a benign scenario is about 2% GDP deficits this year. We could easily be looking at 3 ½ to four percentage point deficits this year stretching out to next year if we are in that very serious downturn. And it's really hard to imagine, you know, if we are staring down, you know, very high unemployment rates, you know, the usual stresses that come with the dark, deep recessions that any party would, you know, stand in the way of, you know, rolling out them. You know, more traditional stimulus packages

RQ: Yeah, it's pretty tough to see us not moving closer to recession, if not into recession. So, yeah, I think, you know, another percentage point of GDP on the deficit, taking it to 90 plus billion seems very plausible. You know, and as Rebecca said, there's worse scenarios in the past that we've seen. So, you know that that is something I mentioned. You know, a fair bit of this large deficit is priced in that is not fully priced in, I would say. And you know that that is why I think there will continue to be this upward pressure to some on yields, again fighting with the downward growth outlook. But yeah, the supply factor is going to be with us for some time still.

BK: And Roger, while I've got you. We are getting questions on your current forecast here for Canadian rates for bonds, but then also on the C dollar. Can you give us sort of goal posts what you're looking for, sort of maybe Bank of Canada sort of moves, but then also for the C dollar ahead?

RQ: I mean for the Bank of Canada, you know, our economists are noting that there's, you know, there's this risk on the inflation side from tariffs, which may cause them to not want to cut rates too much. But then there is the growth hit from the trade war. My, my view on that is the initially will emphasize the growth impact of the trade war first and therefore they probably cut rates somewhat further. So, I think that keeps short term rates somewhat low and somewhat lower than they are for the Canadian dollar. I think the story changed quickly with the, you know, the rest of the world starting to lose confidence in the US to some degree, at least so far. That's the story that could become a lot more significant. And so, we've already seen Canada react to this first when we escaped the or escaped the worst of the reciprocal tariffs on April 2nd. You've seen the Canadian dollar strengthen since then and then also with the broader weakening of Canadian of the US dollar, sorry globally that's also, you know, relatively helped the Canadian dollar as well. Our FX strategist Sean Osborne, he's of the view that the Canadian dollar can strengthen further as this kind of weak U.S. dollar story continues.

BK: Perfect. Thank you both. Getting some questions here about sort of stance to sort of tariff negotiations and more. In the last night's acceptance speech, the new PM suggested very hostile approach to President Trump. Just wondering how our response or approach might look. And beyond that, of course, now with the minority government, does that affect negotiating stance? Does any sort of trade positioning need to be discussed or, you know, brought in front of the other people in the House? Any thoughts on that, Rebecca?

RY: Yeah. And I think that's a great question. And you really have to, you know, compartmentalize it. First of all, you know, negotiating with President Trump, I think they're just huge uncertainty. Nobody really knows what the end point is. And you have to look sector by sector or, you know, issue by issue. You know, it's not all, you know, the same objective. And so, I think there is some sense that, you know, tariffs are going to be higher irrespective of who's in the negotiating seat. So, there is a degree of uncertainty whether, you know, whether it mattered who was in the negotiating seat, whether they had a minority or a majority in that seat in terms of, you know, the, you know, the, the reaction or the response function of, of Trump to who is in that seat. So, we still have that? I would say the so far, the Prime Minister has taken a very targeted approach to reciprocal tariffs and that is part of why we see a weakening, or you know, of a stronger deterioration in the US economy in the Canadian one. Because, you know, when you're tariff other people, you're, you know, you're essentially taxing your own people. So, because, you know, so far, the Prime Minister has been very, very targeted not for one for one in reciprocal tariffs that you know, has been a bit of a plus. I think that we can expect to see, you know, an accelerated timeline for Kuzma renegotiation also on the table moving forward. So, there is that block of, you know, issues that I think will, you know, certainly the Prime Minister will need some mandate, negotiating mandate on what he can and can't, you know, offer up in those negotiations. But there is this whole other domestic agenda of stuff that the Prime Minister can do. And it would be really challenging, I believe, for some of the other parties to stand in the way of, for example, sector specific supports. So, you know, the Prime Minister has, you know, promised literally billions of dollars and, you know, to the auto sector, to the agriculture sector. So, if we are in this kind of persistent trade war and you know, you know, where some sectors are being hit particularly hard or some regions in the country hit particularly hard, I think that, you know, that the Prime Minister would be able to find a way to get, you know, supports out there. I think the bucket of areas that'll be a bit more challenging will be on the structural reforms, the medium-term stuff, the stuff that, you know, the, the stuff that takes a couple years to roll out, because again, we're likely looking at a shorter time frame. You have to get there. Just the final point I would mention, though, on the, on the policy areas that the Prime Minister has committed to and in a very short timeline, obviously interprovincial trade, it's not going to be the panacea for, you know, the world we're in right now. But the Prime Minister has promised by July 1st to, you know, bring down, you know, the, the at least the federal barriers to further trade integration. And what the Prime Minister does have going for him is that he's got a number of provincial counterparts, including, you know, other party stripes that sided with him during the campaign trail. So, you know, we should expect to see some momentum on that front as well.

BK: Actually, Rebecca, while you are sort of speaking just about some of these announcements, what are next steps, timing? Is there any sort of dates that, you know, our listeners should be staying close to the media to hear about announcements?

RY: Well, you know, it's certainly on the US front, we don't know a lot. We know that, you know, the, the, the tariffs on auto parts are supposed to come next week, but we heard yesterday maybe they won't come. So, we're going to live in that world of kind of, and we still have the reciprocal tariffs that were deferred until early July. So, I think there's kind of that ongoing, you know, agenda that we really have no line of sight on where it's going. On the domestic front. I would say, you know, in the very near term, expect, you know, Parliament to be recalled within 4 weeks with this speech from the Throne. Expect, you know, we do have an AA G7 summit in Canada on, you know, in early June. Expect that to be a forum where the Prime Minister might want to lay the marker on a couple of issues like, you know, increased military spending, increased trade, diversification with European partners, for example. And then expect the, you know, budget to follow on the heels shortly thereafter because the Prime Minister has pledged, you know, July 1st is a big day in his agenda. So, he's promised those very internal trade barriers, he's promised the income tax sound by July 1st. So, I think that implies there will be a budget before then and likely a pretty substantial budget. So, I think, you know, again, we it's yet to be seen where he's going to get those handful of additional supports or votes along the way. But I expect that he'll try, and it'll be really important to see how successful he is, at least on the domestic front and on those key touch points.

BK: Thank you. Rebecca. You know you mentioned kind of sectors and how we think about index sectors. So, I'm getting some questions here from our listeners, you know on different sectors, sort of financial sector, telecom, real estate and maybe let's take it back to our strategist here, Hugo Saint Marie. You know what sort of early on here, you know, do you expect for the different sectors of our stock market, any thoughts maybe ones look more better positioned here and maybe which have you know greater headwinds any thoughts there?

HM: We, we have adopted in the last, I would say a couple of months or more defensive approach in our sector positioning. If you recall, we went from let's say being a bit more cyclical and when with the global trade war, we started to move or de risk the portfolio adding to cash, adding to other defensive sector likes the staples like the gold as well. We've reduced the cyclical indeed where financials are now under weight for us industrials is an area where we're underweight, we're underweight energy as well. More specifically on the financials this in a few months ago, I was quite upbeat. I was thinking that with a lot of Bank of Canada rate cuts, maybe financial, the banking sector could do well supporting economic activity in the country, supporting consumer spending. But clearly with the all that shifted, I would say with the global trade war, with the tariffs now if we're flirting with recession, clearly I'll take consumer spending could be surely on the weaker side, maybe unemployment rate could be going up at the margin, I would say so given that we've reduced the banks within the financial sector would prefer the insurance companies over banks stocks within. We were talking about what in the telecom space. That's a sector that has been punished hard last year on an absolute and loads of basis. So maybe there's a bit of less downside on a relative basis. It's probably more defensive, but we've maintained an underweight positioning, nonetheless. There's still a lot of competitions. Earnings growth is extremely modest, shorter sector is cheaper, strong dividend yield. But in the grand scheme of things, we were not fan of the challenging outlook as we speak. So, I think that covers positioning within industrial. I would say, as I was mentioning earlier, we're underweight the industrial sector. Why again, if you have ISM PMI retreating further in in contraction territory in with economies flirting with recession, usually that could be add win for activity in the space, especially with a lot of tariffs we we've seen the rails underperforming. So, we're all the space we we've adopted a more prudent approach. It would still like as I mentioned earlier, the engineering space within the industrial sector, that's a space that could have decent tailwind for quite some time. So, a bit more defense I think is still warranted despite the bounds we've seen in the market label.

BK: Thank you. Hugo, I am getting a question about a transcript for this call that there should be a replay available after so everyone can listen in to its entirety or although I'm sure there'll be some sort of further thoughts being published on everything we've discussed. Let's switch over to Pat. Have a couple questions for a friend in Calgary here. One question coming and asking about just sort of government involvement, regulations and sectors. I don't know if this was a big sort of part of Mark Carney's platform, but Pat, any expectations for any change’s regulations?

PB: Yeah, I mean, I, I think if we start with the, the energy business in particular, I mean the, the regulatory hand has been fairly strong through the prior governments. And so, with the Liberals coming in, I think it's, it's kind of multi-dimensional on the on the emissions management side of things. The industrial carbon tax very much is, is looking like it's here to stay. And so that again dovetails into components like the emissions cap, the escalation in pricing and then the investment tax credits that can come back to companies who seek to spend capital on decarbonization efforts. So, I think that is continuing and the way the platform talked about it was that that would be improving and tightening. So, we're not totally clear on what that means. There could be elements coming in, in terms of more efficient carbon markets and trading. There was also suggestion that there might be a Nexus there between consumers and companies. So, I think that remains to be seen when we think about project approvals. And so, this goes beyond energy and goes into the broader resource natural resource sector. Both parties were on the campaign trail trying to convey a one and done approval process rather than having multiple jurisdictional interests come into complicate the process. And then long story short, what used to be a five-year process with the Liberals is targeted to now to be about a one to two year process. So, I think that could be significant for major infrastructure projects and resource development. As our infrastructure analyst would be quick to point out, long linear projects, particularly things like pipelines, transmission, etcetera are not always easy to build in Canada because there are multiple social license considerations and court proceeds that can't poke processes that can kind of get into the mix. And so that's something to watch for. In terms of the rest of the economy, I, I think there's a couple of things there. I think there, you know, will be an effort to try to foster more internal growth. So, you know, not only bringing down like interprovincial trade barriers, but trying to improve the, the ability of business to become more commercial. And, and then I, I think you'll also see some efforts to protect right and defend versus a more hostile world globally. So, to me, that's where the regulatory touch points are coming into question.

BK: Thanks, Pat. I'm getting some questions on the technology sector. You know, the Liberal platform involved a discussion about funding and focus on homegrown AI, artificial intelligence. Hugo, are you pleased with what you're seeing on that front? I, I think we need greater Canadian tech, IPO's and other companies. Are we heading in that direction? Any thoughts?

HM: Well, quickly, I think that that's the right move to do. We, we, as you said, we clearly need more companies. I wrote I tech companies in this country. But when you looked at the TSX index composition from a tech sector perspective, I don't think that's going to move the needle that much to be honest. You have like 2 stocks that account for almost a big, big chunk of the, of TSX technology sector that Shopify and Constellation software the, again, the account for lion share. So, I'm not sure that's going to move the needle there. If you talk at broadly about the tech sector, we're underweight in the US, not that we don't like the prospect. But again, when you looked at the economic outlook with probably some inflation vibe or stagflation vibes, I would say, so mildew growth, higher inflation, think that could still put pressure on stocks with elevated valuation or I would say sky high valuations, especially that on the yeah, I side, like the team will play on for the next few years for sure. But in terms of winners and losers, again, there's certainly more competition for those big tech stocks in the US especially that it was a very crowded trade. So that's why we've reduced or exposure to tech and all those big growth tech stocks to underweight from in the last few months.

BK: Thank you, Hugo. I dislike being pessimistic, but Roger, this is probably one for you. If we do head into recession sort of any thoughts about Canadian yields where you expect a sort of them to head, you know versus where we are now, what are we pricing in currently? Thoughts?

HM: I think, I mean, if we do head into recession, I do think there's scope for the central bank to cut somewhat further. You know, I think 2 ¼, that's the low side of their broad estimate of what neutral is 2 and a quarter, 3 and a quarter. And you know, it, it'll depend on how bad the recession is. Obviously the, the, you know, the tariffs do make it more complicated for essential bank because they do put up some prices. But I think that's a little bit more of a problem in the US where they're the ones imposing the tariffs. We're not retaliating as much. So, I think we have some scope for rates to be lower there. And so that and then the recession and slower growth will tend to pull the whole term structure lower. But more so the front end at the long end, we still have the risk of on the fiscal side, there's still a lot of spending. And then also from the US side and what's happening with their yield curve and the pressure on from both fiscal and the US kind of changing its role in the world, the pressure on long yields there, that's going to continue to exert an influence on Canada also. So, I think steeper curve, lower front-end yields.

BK: Thank you. Getting a few more questions must have come from Western Canada, Pat on whole carbon tax things and how situation and how things could unfold. Maybe a few more thoughts kind of in that regard.

RQ: Despite all accounts, um, you know, a couple months ago was to be Canada's carbon tax election. And I think in many ways it still was, but it maybe wasn't the way it was expected to unfold. You had Mark Carney come in and neutralize the, the consumption on the fuel and heating side component of that. And so that, as he pointed out, removed a pretty divisive issue, but the industrial carbon tax still remained in play. And it was interesting because Conservatives didn't really clarify exactly where they were going with that until kind of the eve upon the election, so to speak. And then the Liberals came in with their plans to maintain it. And so, as we go ahead, I still think that is a pretty central issue within the business community of Canada in terms of affordability. We have one of the highest priced carbon regimes in the world. And so, as we March forward, there's the concepts of price escalation which may well continue into the next decade as we find out specifics. There's also the concept of stringency, where the ratcheting down of emissions required becomes more difficult overtime. So, it may be an underappreciated factor as we push ahead that as you look at corporate revenues and therefore cash flows and earnings, the bite becomes more onerous if abatement strategies aren't undertaken on the capital side. So, if you just want to pay the compliance cost, take the speeding ticket. Your, your fares are going to go up and they'll go up quite materially over time as planned. Whereas if you want to spend the mitigate, you can, you can seek to basically offset those compliance costs. So, the idea of closer connected carbon markets trading within the carbon markets, the connectivity maybe between companies and consumers, that remains to be seen. I think this will all be very closely watched and from a competitiveness standpoint, particularly as we're thinking about international competitiveness, it's, it's an important consideration for the financials of getting companies as we look ahead.

BK: Thanks for that. I'm getting the hook here on time. We're coming close to an hour. You know, with that we have covered a lot of ground. I did want to remind everyone much more research on all these topics and as always is available, you know, please reach out to any of the speakers, myself or your Scotia contact for more details. I want to thank our speakers Rebecca, Roger, Hugo and Pat for taking the time today on this incredibly interesting and changing situation. And thanks to all our speakers for tuning in and all the Scotia report. Have a great day investing.